What's the difference between tax evasion and tax avoidance? One's legal and the other could lead to a courthouse visit, yet companies engaged in either activity are often treated with the same disdain.
Just ask Caterpillar. The industrial manufacturing multinational didn't play some cloak-and-dagger game to conceal profits from Uncle Sam--at least that is not the picture painted by the Senate permanent subcommittee on investigations report on the firm. But in the eyes of many lawmakers, including the ones who produced the report, Caterpillar might as well have evaded taxes.
What the Peoria, Ill.-based company did, with the help of PricewaterhouseCoopers, was exploit legal loopholes to move money from its replacement-parts business in the U.S. to Switzerland to avoid paying $2.4 billion in taxes over a decade.
While 70 percent of Caterpillar's parts operations is in the U.S., only 15 percent of the profits from that business are booked in the country, according to the report. Before the company instituted its Swiss tax strategy in 1999, 85 percent of the earnings from the division were recorded in the U.S.
It's not like Caterpillar has skipped out on its tax bill. By its own account, the company paid $1.8 billion in federal taxes in the last three years. Caterpillar says its effective income tax rate averages out around 29 percent.
But that means little to lawmakers who say it is fundamentally unjust for corporations to deny Uncle Sam tax revenue, when corporate profits are at an all-time high. And, perhaps more importantly, American families and small businesses aren't afforded the same sort of breaks because they can't afford an army of high-paid tax lawyers.
"Tax avoidance costs the Treasury tens of billions each year, making it harder for us to invest in the education, innovation and infrastructure that promote our prosperity, and to adequately fund our national security," said Sen. Carl Levin (D-Mich.), chairman of the subcommittee, at a hearing on Caterpillar's tax strategy Tuesday.
U.S. multinationals dream up all sorts of legal schemes to avoid paying the 35 percent corporate tax rate all the time.
A recent study by Citizens for Tax Justice found 288 Fortune 500 companies paid an effective federal income tax rate of 19.4 percent between 2008 and 2012. Another 26 of corporations in the top rung, such as Verizon, Boeing and General Electric, paid no federal income tax during that period-- although they paid state taxes.
There is a general consensus among lawmakers and financial reform groups that the U.S. tax code is in desperate need of an overhaul, especially laws governing foreign earnings. Companies, under the existing law, can avoid U.S. taxes on foreign-earned profits until they bring the money home. This has encouraged companies to stash an estimated $2 trillion in profits overseas.
Congressional Republicans have pushed to cut the corporate tax rate to 25 percent to, as they say, level the playing field for U.S. corporations operating on the world stage. They have argued that the country's tax rate, one of the highest in the developed world, stymies business growth and encourages firms to move their operations overseas.
This argument surfaced throughout Tuesday's hearing as Senate Republicans lauded Caterpillar's success and denounced the subcommittee's attempt to go after the company for a legal tax strategy.
At one point, Sen. Ron Johnson (R-Wis.) said if Congress changed the law to prevent Caterpillar and others from shifting profits made in the U.S. to countries with low tax rates, it would force companies to move overseas.
"We can change that law. We can change that reality. And then manufacturers, and then companies like Caterpillar will start manufacturing overseas," Johnson said during the hearing.
He went on: "We have a company like Caterpillar...manufacturing here, exporting product overseas, now we're gonna hold a trial here against a company that's manufacturing and exporting, which is what everybody here -- all these politicians here in Washington want us to do. I mean, does that sound just a little -- a little crazy to you?"
One Republican after another highlighted Caterpillar's record of creating jobs in the U.S.-- the company has added more than 13,000 jobs throughout the country in the past 15 years, bringing its domestic rolls to nearly 52,000 employees in 2013.
But that's not the point, Levin reminded his colleagues.
"Of course this company is a terrific company. That's not the question. Of course it pays taxes. That's not the question. The question is whether or not it properly avoided paying $300 million a year in taxes," he said. "The issue is was there a tax strategy here which was put in place, which is justified under the current tax code?"